In the case Penfound v. Ruskin[1], the Debtor was 54 years old and planned on retiring at age 62 – approximately three years after the expiration of his Chapter 13 Plan. The Debtor had always made contributions to his 401(k) plans throughout his working career and intended to continue to make contributions to his retirement account during the pendency of his Chapter 13 bankruptcy.  The Debtor was contributing $1,375 per month to his 401(k).

The Debtor proposed a plan where unsecured creditors would be paid $22,175 over the 5-year Chapter 13 Plan. During the life of the plan, the Debtor planned on making $82,000 in contributions to his retirement plan. The Chapter 13 Trustee objected to the confirmation of the plan, contending that the contributions should be included in the Debtor’s disposable income under 11 U.SC. § 1325(b)(2)(A)(i).  Section 1325(b)(2)(A)(i) defines disposable income as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance and support of the debtor.”  The bankruptcy court agreed and ordered that the Debtor amend the plan and direct the contributions instead to creditors. The Debtor’s plan payments increased from $513.30 bi-weekly to $1,147.92 bi-weekly. The Debtor appealed the bankruptcy court’s order to the federal district court.

On appeal, U.S. Federal District Judge Avern Cohn of Detroit held that the Debtor’s voluntary post-petition contributions to a 401(k)account are part of disposable income and must be paid to creditors through the Debtors’ Chapter 13 Plan.  Judge Cohn relied heavily on the Sixth Circuit case, In re Seafort, 669 F.3d 662 (6th Cir. 2012).   In Seafort the Sixth Circuit held that income that becomes available after a debtor repays a 401(k) loan during the plan period is disposable income that shall be paid to unsecured creditors.  In the footnotes to the case, the Sixth Circuit said it did not agree with the assertion that contributions may be deducted from disposable income if the debtor had been making contributions before bankruptcy. Judge Cohen conceded that the footnote was dicta, but said “it clearly indicated [the] position [of the Sixth Circuit] on the issues” and upheld the bankruptcy court’s order that the Debtor’s must include his contributions to his retirement as disposable income to be paid out to creditors.

Bankruptcy courts across the country are divided on whether debtors may exclude their voluntary post-petition contributions to their 401(k) retirement plan from the calculation of disposable income. There is a three-way split on how to treat voluntary contributions to retirement accounts. Some courts disallow all contributions to retirement accounts; others allow contributions, but only for amounts the debtor was making before bankruptcy (i.e. the Debtor cannot increase his/her contribution amount in anticipation of filing bankruptcy); and a third group allows contributions up to the amount permitted by the IRS, but subject to

a “good faith” requirement.  The split between the courts effectively allows some debtors in more favorable districts to continue to save for retirement over the 3 to 5 years they are in Chapter 13 Bankruptcy, thereby giving them better financial stability into retirement, while Debtors in districts that disallow post-petition voluntary contributions to retirement accounts are at a disadvantage because they are losing 3 to 5 years of retirement contributions and savings. Whether debtors’ voluntary contributions to 401(k) retirement accounts are disposable income in bankruptcy is a ripe issue for the U.S. Supreme Court. There needs to be uniformity across the country on how bankruptcy courts treat voluntary post-petition contributions to retirement accounts.

Most individual debtors filing for bankruptcy relief are required to complete a version of Bankruptcy Form 122 to determine their current monthly income and disposable income. Debtors’ and creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices

[1] Penfound v. Ruskin, 18-13333 (E.D. Mich. Sept. 20, 2019)


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